Nigeria

Cassava Chip Export 2012 China Term Sheet & Transaction Opportunity Brief

Jointlypreparedby: FederalMinistryofAgriculture&RuralDevelopment TheNigeriaIncentiveBasedRiskSharingSystemforAgriculturalLending(NIRSAL)MarketAccessDesk

CentralBankofNigeria,NIRSAL,andFederalMinistryofAgriculture&RuralDevelopment,2012

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Contents
0. 1. II. III. IV. ExecutiveSummary...............................................................................................................................3 TransactionTermSheet&Framework.................................................................................................4 Introduction..........................................................................................................................................7 NewMarketImpetusandOpportunity............................................................................................7 CassavaSupply&Processing............................................................................................................8

V. CassavaChipMarketContext:TheChinaPlay .....................................................................................8 . VI. VII. VIII. IX. X. XI. XII. XIII. SolvingtheCustomerStandardRequirement:InitialCapability......................................................9 SolvingtheCustomerStandardRequirement:TechnicalPerformance...........................................9 SupplyRequirements:ProcessorCapacity........................................................................................9 ProFormaAssumptionsandEconomics.........................................................................................10 WorkingCapitalFinancing:ChipProcessorsAccesstoRawCassava.................................................11 WorkingCapitalFinancing:FarmerAccesstoChipProcessors......................................................11 TransactionRisksandSelectManagementOptions.......................................................................11 Conclusion.......................................................................................................................................12

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0.

Executive Summary

Thepurposeofthisbriefingdocumentistosummarizeanopportunitytoexport800,000metrictonsof foodgradecassavachipstoaprespecifiedbuyerinmainlandChina.Nothinginthisdocumentincluding forward looking statements should be construed as legal, tax, accounting, financial or investment advice.Allpartiesareadvisedtoperformtheirownduediligenceasappropriateinadditiontoseeking outprofessionaladviceonthesuitableoftheinvestmentopportunitygiventheirrisktolerances. Forfurtherinformation,pleasecontactthefollowing: FederalMinistryofAgriculture&RuralDevelopment NIRSALMarketAccessDesk JudeUzonwanne Mr.JamesAwoniyi Dr.MartinFregene Head,NIRSALPIO Member,CassavaValue SeniorTechnicalAdvisertothe E:uzonwanne@hotmail.com ChainTeamandHead,Fuel HonorableMinisterandTeam M:07033720591 EthanolWorkingGroup Leader,Cassava FederalMinistryof FederalMinistryofAgriculture E:mfregene@danforthcenter.org Agriculture E:jawoniyi2000@yahoo.com

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1.

Transaction Term Sheet & Framework

Category KeyParameters

TransactionOverview
TotalVolumeof Cassava 800,000tonsat50,000tons/month;firstmonthvolumeswillbepilotvolumes of15,00020,000tons Exporter/processorsshouldparticipateintheprogrambasedontheirbalance sheetstrengthi.e.someexporterswillship1,000tonswhileothersmayexport 5,000tons;theobjectiveistotakealevelofriskcommensuratewiththe financialflexibilityaffordedindividualexporterbalancesheets 1.75billion(for50,000tonspermonth)basedonpertonaveragefully loadedchipproductioncoststructureof37,288 15companiesandvolumesexportedbyindividualcompanieswillvary Numberexpectedtogrowaslongasfirmstrainedandhaveprocessing equipment Open 16%22%basedonindividualfinancialinstitutionborrowingcosts Fulldisclosureofallapplicablefeesandtransactioncostsviaitemization Minimumof120daysbutisflexibledependingonborrowerrequirements

MonthlyMaximum FinancingRequired CurrentNumberof Borrowers NumberofLenders InterestRateRange Duration CassavaSource Technical Requirement FreshnessTesting QualityControl

27statesintheSouthwest,NorthCentral,Northeast,SoutheastandSouth South MoistureContent:<12% Processortestsrandomsamplesofcassavarootsbeforeharvestingusing specificgravityequipmenttoconfirmstarchcontent FMA&RDsponsoredtrainingsessionsofdriedchipproducersfromThai TapiocaDevelopmentInstitute(TTDI),HuayBong,Thailand ChecksfromShedaS&TC,FIS,SONandNAFDAC

FinanceofFresh CassavaPurchase

Financial&DeliveryTerms
Subjecttolocalmarketconditionsandcassavaaccess,flexiblemodelsinclude o Useoflocalpurchaseordersand/orbankletterofcomfortspecifying paymentondeliveryofspecifiedquantityandqualityoffreshcassava o Inothersituations,directcashtransfertoborrowertopayfarmer acceptable US$236/tononinitialcontract PricewillbeadjustedmidstreamofcontractassupplydemandshiftsinChina in2ndhalf2012 Oceanfreight(containerized)toChinaonCIFbasis CoveredbyLetterofCredit 70%paidupfrontuponloadingofvesselatNigerianexportport;30%upon Page4of12

ChipPurchasePrice

ShippingBasis PaymentTerms

ForLimitedDistribution acceptanceinChina LoanprovidedbyNigerianfinancialinstitution Inprinciple,75%coveronoutstandinganddecliningprincipalandinterest balance DurationofCRGbasedonthedurationoftheunderlyingloani.e.flexible basedonthetermsofindividualcredittransactions Rangeof0%25%percentbasedonindividualinstitutionalriskappetite Flexiblelevelbutataminimumshouldcovervariousfeesandtransactioncosts aswellassignalcommitmente.g.5%to10% 15%to25%ofloanvalue;variedformsofcollateralacceptableincluding specializedmachineryandwarehousesrelatedtochipbusiness Expectationthataschipmarketexpands,resaleandsecondarymarketvalues forequipmentwillbecomemorecommon AllexporterswhoseekaccesstoFMA&RDprojectsmustparticipatein FMA&RDThaiTapiocaDevelopmentInstitutetrainingsession,andsignan MoUwithFMA&RDagreeingtocomplywithqualityandprocesscontrols

FinancingTerms NIRSALCreditRisk Guarantee(CRG)

BankRiskSharing BorrowerEquity BorrowerCollateral

OtherRequirement

RiskCategory CassavaSupply

TransactionRiskConsiderations (Sequential)
Definition Sufficiencyofcassavasupplyat costeffectiveprice Appropriateleveloffreshness andstarchcontent PotentialMitigation Suppliedfrom27statesensuring sufficiencyoffeedstockwith moderatepriceappreciationrisk Usestarchtestingequipmentto confirmsatisfactorystarchcontent prepurchase Processwithin48hoursofharvest TrainingbyThaiTapiocaInstitute InspectionbyShedaInstitute InspectionbyNAFDACandFIS Creationofonestopshoptobe locatedatFMA&RDinAbujaand regionaloffices Onestopwillissueallrequired certification PoliticalmanagementbyHon.Min.of Agriculturee.g.briefingofNEC/FEC Mediacampaignandoutreachto ALGON Insurancecoverpurchasedoncargo Useofcustomersagente.g.SGSor BureauVeritas Lockinforwardpurchasecontracton US$Nairavalues

Processingand Performance Quality Internal Inspectionand Certification

Meetingtechnicalspecifications setbycustomer Minimizingdelaysassociated withregulatorydispersionand/or inefficiency

Internal Transportand MultipleTaxes Ocean Transport Customer Acceptance FXRisk

Minimizingcostsandtaxes imposedbetweenloadpointand port Lossofcargoatseadueto normalmaritimerisks Rejectionofcargoforfailing technicalorChineseinspections NairastrengthsagainstUSD, reducingNairadenominated profits

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HighLevelProjectActivities,PartiesandTimeline
Activity
TermSheetandbrief circulated Assembledocumentation andrefinebusiness planning Exportersapproachbanks andcommencecredit applications Banksreviewandprovide decisiononapplication Submitcreditrisk applicationtoNIRSAL Exporterssubmitdetailsof equipmentandkey personneltoFMA&RD Publishscheduleand locationofThaiTapioca DevelopmentInstitute CassavaTraining Concludetrainingand commencecassavabuying Finalizecommercialterms includingpilotwithoff taker OpenLCforexporters Authorizationof1stop shop(discussionand review) PoliticalandEEG engagementofALGON, StateGovernors,NECand FEC Process,transportand prepareforexport 1StopShopInOperation includingbriefingsession forrequiredagencies Conductofftaker/ customerinspections ConductallFederal inspections

Deadline April9 April11 April1216 April30

Status Ongoing Ongoing Ongoing Notstarted Notstarted Notstarted Underdiscussion

ResponsibleParty NIRSALMarket Access Exporters Exporters Banks Banks/Financial Institutions Exporters FMA&RD

Oncecreditapproved April1116 April17

April24 April17 April17 April17 April1

Underdiscussion Underdiscussion Underdiscussion HMAbriefed Underdiscussion

FMA&RD FMA&RD FMA&RD FMA&RD HMAFMA&RD

April30Open April30 May1onwards May1onwards

Inpreparation Inpreparation Notstarted Notstarted

Exporters FMA&RD Customeragent 1StopShopTeam ofSON,Sheda,FIS andNAFDAC

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II. Introduction

Nigeriaistheworldslargestproducerofcassava.In2011,Nigeriaproducedapproximately36 40 million tons of cassava. It is estimated that due to postharvest losses of ~20%, about 6 milliontonsofcassavaislostatharvest;theestimatesmaybeunderstatedaslossalsooccurs fromleavingcassavainthegroundformorethan1215months.Ofthevolumewhichreaches market,themajorityisusedforfoodandindustrialprocessing.Asaresult,Nigeriasuppliesless than 5% of the worlds cassava chip volumes. The intent of the export initiative is to raise Nigeriaschipexportsmaterially.

III.

New Market Impetus and Opportunity

TheAgriculturalTransformationProgrammes(ATA)cassavasupportisfocusedondoublingthe production of cassava by using higher yielding varieties, intensifying the use of fertilizer, appropriate crop protection compounds, and extension workers. Therefore, we anticipate additional volumes of cassava will be available above and beyond normal food and industrial requirements. Due to shifting patterns of demand for cassava and the existence of a strong 20112012harvest,approximately22milliontonsofcassavaisavailableforusetoday(across 1.6hectares). Normally,thevolumesnotedabovewouldbeharvestedorallowedtodecayintheground.If harvested in a year suffering semiglut conditions, it would typically attract less than competitivepricing,discouragingfarmersandleadingtoascalebackinvolumesplantedinthe nextyear.WithascaledbacksupplyinYear2,amoderatepriceriseoccursandinYear3,a further price increase occurs, leading typically to overconfidence and oversupply in year 4. Suchadynamicisstartingtoemergein2012triggeringtheneedtoidentifyalternatemarkets forcassavaatattractivepricepoints. Thus,followingaJanuary2012meetingwithcassavachipbuyersinChina,theFederalMinistry of Agriculture & Rural Development (FMA&RD) reached agreement on a commercial export opportunity.Theordercallsfortheexportof800,000metrictonsofcassavachips(3.03.2 milliontonsofrawcassavabasedona3.75x4.0xconversionratio)overa12monthperiod startinginMayorJune2012.

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IV.

Cassava Supply & Processing

The required cassava will be supplied from 27 states of the federation in the North Central, Northeast, South South, Southwest and Southeast. The specific sources will be a function of supplydemand balances and the relative sourcing requirements of existing industrial users around the Ogun axis for example. From a pro forma view, the majority of volumes will be sourced from Kogi, Taraba, Nasarawa, Benue, Kaduna and related high volume producers. Individual nonNorth Central states such as Oyo, Edo and Delta are also expected to make significantcontributions.Inthefinalanalysis,thechipprocessorsareexpectedtoreachterms withfarmers,cooperativesandrelatedentitiesatcommercialterms. Giventhediversityofsourcing,processingthereforemustbeasequallydiversebutadhereto central standards and grades in order to meet customer specifications. The shortlisted participants in the current contract are required to have processing facilities proximate to cassava production regions, a fundamental principle for all future agribusiness transactions underNIRSALinordertominimizethetransportofnonproductivefreight.

V.

Cassava Chip Market Context: The China Play

Theglobalmarketforcassavachipsandpelletsisestimatedat~US$1.5US$2.0billionin2011. China is the worlds largest buyer of cassava chips. In 2011, China utilized an estimated 6 milliontons,ofwhich4milliontonsor66%wasimported.Akeydemanddriveristhegrowth in use for the animal feed market, ethanol and biofuels market. South Korea is also a large buyer.SoutheastAsiaparticularlyThailand(54%),Vietnam(38%)andIndonesia(4%)arethe leadingexporters. While these 3 leading exporters have strong market positions, their ability to grow is constrainedbystructuralconsiderationssuchasyieldperhectareboundariesbasedoncurrent technologyandavailabilityofcosteffectiveland.InThailandscase,the2011floodswipedout significantvolumesofcassava,damagedaccesstofarmland,andreducedusefulnessofsupport infrastructure. Therefore an opening exists for Nigeria which does not face the aforementioned structural constraintstostepinandcapturetheincrementalgrowthinthemarket.Capturingopportunity ishoweverafunctionof2importantgatingrequirements:(1)meetingthestandardssetbythe customer;and(2)achievingacompetitivedeliveredpriceforcassava.
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VI.

Solving the Customer Standard Requirement: Initial Capability

Given the importance of the chip export contract to Nigerias forward looking supply reputation, the FMA&RD and select partners constituted a committee to identify Nigerian companiescapableofperformingtothetechnicalspecificationsofthecontract.Ratherthan advertiseingeneralmedia,theMinistryadvertisedwiththe2leadingcassavachipandfarming associations,andoneindustrialgroup.Usingasetoffilterspriorexportexperienceandcash flow, as well as ownership of chip making equipment the pool of possible companies was narrowedto15companies.Finalduediligenceandreviewsofthe15mayresultinadditional pruning if necessary, otherwise the 15 would be formally invited to fulfill the terms of the Chinesecontract.

VII. Solving the Customer Standard Requirement: Technical Performance

The FMA&RD is finalizing discussions with the Bangkok based Thai Tapioca Development Institute(TTDI)toprovidespecifictrainingontheguidelinesandprocesscontrolsrequiredto meetthestandardsoftheChinesebuyer.Alsobeforeshipmentofthechipcargo,anumberof additional federal laboratory analysis and inspections will be performed by the following entities: Sheda Science & Technology Complex (FCT Abuja): Reviews the quality of the final productandifsatisfied,issuesacertificateofcompliance Other MDAs including SON, NAFDAC and the Federal Inspection Service will perform regulatoryrequiredaudits Discussionsareunderwaywithallrelevantpartiesanditisanticipatedthataseriesof1week courses on quality and process controls will be launched in April 2012. The courses will be deliveredinmultiplelocations.

VIII. Supply Requirements: Processor Capacity

As noted above, the overall initial contract is for 800,000 tons. Based on current installed capacityoftheshortlistedfirms,thesuppliernetworkofeachfirmcanproduceonaverage100 tonsofchipsperdays,oratotalof1,500tons/day.Assuming26daysofproductionpermonth, totaloutputwouldbe39,000tons. However,weestimatethataslearningcostsdeclineand
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overall running efficiencies improve (e.g. hours of operation, number of days per month operated,etc),productionlevelscanimprovedrapidlyto52,650(13hoursperdayfor27days across15firms).Basedonthesesensitivities,thecommercialtermspresumeamonthlysupply levelof50,000tonstothecounterparty.

IX.

Pro Forma Assumptions and Economics

Theeconomicsofproducingcassavachipsatahighlevelfollowthefollowingstructure: SellingPrice:denominatedinUS$/tonat$236$250/tonor37,288/ton39,500/ton (CIF basis) depending on what grade chips required for i.e. ethanol, animal feed,food grade,etc Chipprocessingandlogisticscost:denominatedinNaira/tonincludeslaborforpeeling the cassava, transport to processing site, and transport of chips to port; also includes costofinternationalcontainerfreight Purchasepriceforrawcassava:denominatedinNaira/tonrangefrom5,00010,000 dependingonwhichpartofcountrythecassavaissourcedfromi.e.lowestcostinthe NorthCentralandNortheast FXrate:158toUS$1 Basedontheabove,theproformaandhighleveleconomicsofproducingcassavachipsona pertonbasisisoutlinedbelow.Wehavealsopreparedbasicsensitivityanalysisandnotedkey considerationsthatcouldshiftestimates.

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X.

Working Capital Financing: Chip Processors Access to Raw Cassava

Basedonthedetailedpertoncostofproductionofcassavachips,apreliminaryestimateofthe workingcapitalrequirementonamonthlybasisisv1.8billionpermonthor21.6billionforthe entire 800,000 contract. Given the scope of financing required, a number of creative structuring alternatives exist ranging from individual bank loans to syndicated loans and revolvingmediumtermnotestofarmercooperatives.Creditprovidedtochipprocessorsisin principle qualified to apply for NIRSAL credit risk guarantees (CRG). Approval of such CRG contracts is at the sole discretion of NIRSALs Credit Desk which is independent from the Market Access & Development Team. Therefore, nothing in this memo should imply a commitment,oralorwrittenbyNIRSALsCreditDesktoissuesuchguarantees.

XI.

Working Capital Financing: Farmer Access to Chip Processors

In order to further reduce the cost of transportation and improve farmer cooperative participation in the value chain, the FMA&RD recognizes that additional efficiencies can be obtained by market financing of additional chip making capacity. Logically, such equipment should be in close proximity to the farm / harvest. A logical investment partner in such a context is a farmer cooperative serving a cluster of farmers perhaps in a 10 mile radius, or largefarmer(owningagreaterthan50Hafarm).Suchequipmentisestimatedtocost$2,000 perunit(316,000).Basedontheeconomicsofplantingcassavaandchipping,acommercial profitmarginappearsareasonableconclusion.

XII. Transaction Risks and Select Management Options

Anumberofriskconsiderationshavebeenidentified.Innowayshouldthediscussionwhich followsbeviewedasexhaustive.Theintentistoprovideahighlevelsnapshotof considerationsforcreditproviders: FXRisk:ChipexportersareexposedtotheFXconversionriskinthattheircostsincluding loans will be Naira denominated while revenues are in US dollars. Should the Naira appreciate against the US dollar, Naira denominated profitability margins will shrink. The converse naturally is true, subject to domestic price inflation expectations remainingmuted.
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QualityRisk:Matchingcustomerspecificationsisabsolutelycriticalinordertoavoidthe buyer rejecting the cargo. Therefore the FMA&RD as both an interested party and regulator needs to ensure compliance with customer specifications; in the absence of suchmeasurestheabilitytofinancethetransactionwillunwindforallcreditexposed parties. CassavaSupply:Themopupofcassavabychipprocessorscouldshiftregionalsupply demand imbalances, pushing up average prices for cassava and raising costs for chip providers as well as general food users. That could also damage profitability for chip exporters.

Weanticipatethatmarketparticipantscanmanagetheaforementionedrisksusinganumberof toolse.g.usingFXswaps,3rdpartyauditorse.g.BureauVeritas,andforwardsupplycontracts withguaranteedprices.

XIII. Conclusion
The cassava chip opportunity outlined above is expected to be the first in a series of similar transactions targeted at multiple North Asian markets. In addition, the FMA&RD and key private sector end users are actively working to create new domestic markets for the incrementalvolumesofcassavaenteringthemarketinsecondhalf2012(2H2012)andbeyond e.g.animalfeed.

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